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Northern Oil and Gas (NOG) Q1 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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Northern Oil and Gas (AMEX: NOG)
Q1 2019 Earnings Call
May. 10, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Northern Oil and Gas first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brandon Elliott, chief executive officer.

Thank you, sir. You may begin.

Brandon Elliott -- Chief Executive Officer

Thanks, Jessie. Good morning, everyone. We are happy to welcome you to Northern's first-quarter 2019 earnings call. Before we get to the results, let me cover our safe harbor language.

Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include, among other, matters that we have described in our earnings release as well as in our filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

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During this conference call, we may discuss certain non-GAAP financial measures, including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued last night or in our updated investor presentation on our website. With that out of the way, this morning, we're going to stick to the format we used last quarter. Northern's chairman, Bahram Akradi, is going to lead us off with some of his comments; Nick O'Grady, Northern's CFO will follow Bahram and highlight some of the financial results for the quarter.

I will then make a few summary comments before we open up the call up for Q&A. Like last quarter, we have with us in the room today to help with the Q&A portion: Northern's president, Mike Reger; Adam Dirlam, our EVP of land; Jim Evans, our VP of engineering; as well as Chad Allen, our chief accounting officer. With that, I will turn it over to Bahram.

Bahram Akradi -- Chairman

Thanks, Brandon. With the recent announcement of the Flywheel acquisition, I'm excited to take this opportunity to reiterate and update our strategy and forward path for Northern Oil and Gas. On our year-end conference call, I listed our priorities and our strategy, and I would like to stay with the same format, but update you based on what our expectations will be after closing the Flywheel acquisition later this year. One, remaining free cash flow positive with oil prices in the $40 range.

With the Flywheel acquisition, we expect to expand free cash flow generation. Two, keeping net debt to EBITDA below two and striving for closer to one time. With this acquisition, we remain under two times net debt to EBITDA and will continue to pursue further delevering our expanded -- with our expanded cash flow generation. Three, growing debt adjusted cash flow per share.

Flywheel is accretive to this metric, and we expect debt adjusted cash flow per share to improve. Four, growing the company's production and cash flow without compromising one through three. Flywheel once again accomplishes this. Five, once we have closed the Flywheel acquisition, we are in better -- we are better positioned to replace our second lien bonds on/or before May of 2020.

This will create incremental cash flow from lower interest expenses. Six, coinciding with the interest expense saving from replacement of the second lien bonds, along with expanded free cash flow from acquisition, we are better prepared to initiate a sustainable dividend into 2020. Seven, we really like our position at this point and are excited to be able to raise our production guidance for the year. Thank you for listening, and I look forward to answering your questions later in the call.

Now let me turn it over to Northern CFO, Nick O'Grady. Nick?

Nick O'Grady -- Chief Financial Officer

Thanks, Bahram. And I'll do a brief rundown for context in eight points, and while it's not my reputation, I'll be mercifully brief this quarter. Before I begin, if we can leave you with one item today is that our properties through thick and thin just continued to outperform despite the challenging operating environment over the past two quarters. It's a testament to the quality underlying our business and why we continue to work tirelessly to build an enduring business model.

We remain incredibly frustrated and perplexed by the valuation the market ascribes to our business relative to our recent successes. OK. Here is the rundown. One, capital allocation.

Despite all the challenges the business faced in the quarter, we continued producing positive free cash flow, a testament to our capital structure and the business model. In addition to our drilling and completion capital spending for the quarter, we spent money on two buckets primarily, shareholder returns in the form of $15.1 million in buybacks and approximately $8 million in ground game acquisitions. The ground game had a stellar quarter, and these acquisitions, while small, will have a meaningful impact in future periods. We give some context, the $8-or-so million spent represented 36 separate transactions with almost one-third of these transactions coming from operators attempting to shed other shed non-op interests.

Nothing is too small for us to continue to augment and seek out additional returns. The ground game opportunities, as we see today, have never been better. In particular, much of the ground game activity this year will augment activity levels in 2020, given the focus on near-term drilling opportunities and timing of initial production. Rest assured, however, the timing is factored into our analysis on an IRR basis we make these purchases.

Our D&C capital expenditures at $74 million, included both the 7.0 net well completions as well as the 1.9 net well increase in the wells in process. So while our completions are waited for the middle and later in the fiscal year, we are accruing for the expenses of many of these wells in the first half of the year. Suffice it to say at this point, we see no change in the spending for the year as we are keenly aware of investor fears of capital creep. We are seeing more intensive stimulations and longer laterals in our D&C listed this year, which expect to generate better returns on capital.

We stated on the fourth quarter call that we'll be mindful of increasing activity and growth depending on the environment. Even with commodity price volatility in the past few months, at this point, we see no need to change our activity levels from our previous and current guidance. No. 2, production.

We are excited to say that despite the difficult operating environment, well performance continues to surprises to the upside. The encouraging results allow us to provide solid 2Q guidance as well as a modest production guidance bump for the year, while leaving our cost and spending unchanged for the year. We'll update all guidance items further for our Flywheel acquisition with the second quarter results. I'll remind investors that the Flywheel assets have a modestly lower corporate decline rate albeit with slightly lower oil cuts and slightly higher operating expenses, but better gas pricing yields and most importantly, stellar product productivity that is competitive with our existing assets.

No. 3, seasonal issues. Of the 7.0 net wells added this quarter, many were back-end loaded as the field teams delayed as the winter months drew to a close with nearly half the new -- the net wells coming online in March alone. Pricing differentials for oil in the basin came down from still elevated levels in January, but gas and NGL prices remained depressed throughout the quarter.

This alone represents approximately 40% of the sequential quarter-over-quarter declines in adjusted EBITDA. Our expectation is that pricing for gas and NGLs may remain weak until the third quarter in the year as takeaway improves, but operators have provided strong line of sight for improvements on the horizon. This, coupled with the seasonal production slowdown led to adjusted EBITDA of $104.8 million. No.

4, operating costs. Last quarter, we discussed at length significant curtailments and shut-ins experienced in the Basin, some on timing of infrastructure, some typical for the winter period. In the first quarter, we bore the fixed operating costs of these restrictions directly without the commensurate volumes. This made up about 17% of the declines to EBITDA relative to the fourth quarter.

We have started to see this trend begin to reverse, and we're confident in our initial outlook for LOE and see no change on a full-year basis despite the fact that it may be until well into the third quarter before operations fully return to normal in the field. No. 5, G&A. Our total cost of approximately $1.94 per BOE for the quarter and $1.06 per BOE on a cash basis, which was at the low end of our guided basis.

Our pending Flywheel acquisition should improve these metrics even further over time as we continue to build scale. No. 6, hedging. It was an active quarter, and once again, we have used the strength in current and future prices in recent months to further derisk the asset.

Our strategy remains the same. As capital allocators seeking a return on capital, we look to lock in a portion of those returns as we deploy the capital. No. 7, outlook.

Currently, the second quarter already looks to be a stronger cash flow quarter despite carrying some residual curtailments as higher oil pricing is being aided by costs that are beginning to ease. Given our pending Flywheel acquisition, we'll likely prioritize debt reduction in the next few quarters, which will be augmented further as the Flywheel cash flows are expected to come onboard in July. I'll remind investors that we have placed a cash deposit of $31 million for the Flywheel assets as part of the purchase price, which will show up on the second quarter balance sheet. We're excited to bring these assets into the fold.

Through this acquisition, we are adding more exposure to another high-quality operator in the core of the basin, providing our land team another avenue to augment these assets upon closing. No. 8, and finally, refinancing. We understand this is front and center for many investors.

And just to put a bow on Bahram's earlier comments, we have consistently said we plan to refinance their senior notes on or before May of 2020 and to commence a dividend to our shareholders upon a successful refinancing. With this future refinancing, Northern's flexibility to allocate capital to maximize value creation will truly be untethered. In summary, I'll remind everyone that we remain a company run by investors, for investors, and the year remains on track with an even brighter outlook then even a few short months ago. With that, I'll turn it back to Brandon.

Brandon Elliott -- Chief Executive Officer

Thanks, Nick. Like I did last quarter, let me reemphasize what I hope you have heard from us this quarter. Northern had another good quarter in a string of quarters for the company and our assets have performed at least on plan and often better than planned. Production outperformed again this quarter with cost just slightly higher than our expectations.

Despite the lower gas realizations, primarily driven by lower propane prices in the quarter that drove a good portion of the variance versus expectations, our operating cash flow exceeded our drilling and development capex again this quarter. We continue to gear this business to be cash flow positive even during times of low commodity prices. Debt levels remain in check and apart from the closing of Flywheel, we currently plan to allocate a significant portion of our free cash flow to debt reduction in the coming quarters. We continue to allocate capital in a prudent fashion that will continue to generate long-term growth and critically, debt adjusted growth per share.

Hopefully, this is evident not only in our consistent drilling and completion budget, but also in the logic surrounding the Flywheel acquisition we announced. We continue to plan for the refinance of our second lien bonds over the next 12 months, and plan to use the increased financial flexibility provided by the refinancing to begin returning even more capital to shareholders. Let me talk about some of what has us optimistic about the coming quarters. One, capital discipline by operators is benefiting Northern with increased well efficiency and performance as their own focus on cash flows and returns is giving us a tailwind with which to make our capital allocation decisions.

Operator capital discipline is also causing them to look at and potentially shed additional non-op working interest. Also, as we have talked about for a while now, with the Williston Basin in development mode and larger pad drilling, we are able to accumulate additional working interest in some near-term wells. As Nick mentioned, while these ground game acquisitions can be small individually, they are often some of the highest return opportunities we see on a daily basis. Two, while commodity price volatility presents its challenges, it also presents opportunities.

As commodity prices move lower, we often see increases in that ground game acquisition activity. As commodity prices move somewhat higher, we can see larger acquisition opportunities develop. And obviously, if oil prices move even higher, we will accumulate additional free cash flows to reduce debt and allocate back to shareholders. As a result, despite relatively flat industry activity over the last two quarters, we have ended the first quarter with not only our highest number of wells in process, but also, and most importantly, some of the highest expected EURs and some of the best returns we have seen in the company's history.

We are also encouraged by the early results in some of the step-out wells recently drilled, where we have seen well performance up 70% to over a 100% versus what we would've expected out of those wells a few years ago. So in conclusion, our non-op capital allocation approach to the oil and gas business is working and is evident in the financial strength and fundamentals of our business, despite what the capital market seemed to be indicating. And while we are decidedly unhappy about the treatment our stock is receiving in the capital markets, we are extremely happy about where we have positioned Northern. We remain a small, nimble team with the ability to make very rapid and exact capital allocation decisions.

Yet despite our small employee count, we have some very large company capabilities where we can leverage the experience and expertise from our participation in over 5,000 gross wells, soon to be over 6,000 gross wells with the Flywheel assets, to better allocate shareholders capital to the highest return investment opportunities we see in the Williston Basin. The size and scale we have due to our participation in that many gross wells gives us more control than we get credit for to control our growth and spending, both up and down. Focusing that capital on those opportunities that should generate the highest returns possible for shareholders. With that, I will turn the call over to the operator for the Q&A portion.

Jessie, if you could please give the instructions for Q&A.

Questions & Answers:


Operator

Absolutely. [Operator instructions] Our first question comes from the line of Neal Dingmann with SunTrust. Please proceed with your question.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Nick, good details. My question is for some of the additional opportunities you'll see. You've certainly been attractively picking up higher working interest on some of these attractive deals. I'm just wondering, Nick, for you, Brandon and the team, when the deals are seen, could you talk about -- are there opportunities for higher working interest? And are you willing to do that versus in the past, what was it, kind of 0.5% or whatever you all at play? Maybe just talk about the working interest you're looking at on these deals?

Nick O'Grady -- Chief Financial Officer

Yes. Neal, it's Nick. I think I might let Adam talk a little bit about this because what I'd tell you is that, in aggregate, and this is a -- it's a balance between -- obviously, we talk about capital allocation, and there is such acute focus on budget and things like that and obviously generating free cash flow, and we're -- it's very important to us. But at the same time, we were also inundated now more than ever with opportunities in some cases that have enormous returns on capital employed.

And it's really a balance between managing that budget and those things and those opportunities that present themselves. So maybe Adam, you want to talk a little bit, some concepts?

Adam Dirlam -- Executive Vice President, Land

Yes. Our average working interest is around 7%. We really don't see that deviating as a whole. As far as the opportunities that we're seeing that kind of depends on the counter parties.

So the deals that we're doing with operators, generally those working interest might be a little bit chunkier, just given kind of the operated nature of those working interests. Smaller non-op counter parties, those might be a little bit less. And so it's taking a look at everything in aggregate and deploying capital to the highest rates of return.

Brandon Elliott -- Chief Executive Officer

Neal, it's Brandon. Let me put a little color on that. As I look at the election activity that Adam and Jim have done this last quarter. I mean again, I mentioned in my prepared remarks, but I'll hit it home again, which is, now these really are some outstanding wells that we're looking to participate in with EURs, as I mentioned, as good as they've been and weighted average IRR is continuing to be very, very strong.

So we think from a shareholder perspective this is the kind of capital that we should be committing to. Very high rates of return.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

That makes sense. And Brandon, this leads to my next question -- I agree with your comment, I'm just -- continue to be surprised with the stock given the amount of production and permitted cash flow that is evident that you and Nick have laid out? I mean is there a way -- and I think Bahram had even did a good job talking about that. Is there a way to either sell forward? Or -- I'm just sort of wondering aloud. Is there something out there you think that you can help investors better recognize and create the value upfront? I'm just, again, kind of, surprised at your sales given the cash flow stream, and that is evident out there for -- not only for this year but well in the next year better than much larger companies.

I'm just wondering, again, if investors aren't going to recognize that if there is a different way to bring that forward. Maybe Nick, a question for you?

Bahram Akradi -- Chairman

Neal, this is Bahram. I really appreciate your comment here, but let me just say that -- every time, every quarter that I come in here for this call and every interaction I have on daily basis with this team just gives me the comfort as a large shareholder of this company that this is an amazing company with an amazing team. We literally, as you guys can all attest, completely have transformed this company's balance sheet in the last two years. We're rock solid, we're making money, and we're going to continue to make money.

We're focused on making cash flow a big metric and growing cash flow per share a big metric, and we are on track to do so and -- in the foreseeable future. So while I'm a little frustrated like the rest of the team is about the price of the stock, I think it is temporary. It is literally going to take some time. We're going to continue to demonstrate our capability to deliver what we promised quarter-after-quarter.

The company is going to continue to get larger, bigger. So as we become more -- a larger organization, maybe more noticeable. And then finally, we do need to have a shareholder transformation, so a transition of some shareholders. We are proud of all the acquisitions we made last year.

It was necessary and is strategic to get our balance sheet to get to exactly where we wanted, to cash flow positive. It could get the critical mass that we had been talking about. Having said that, we also recognize that we -- with all the exchanges and all of the transactions we did using our currency, we have a tremendous amount of unnatural shareholders. It's going to take several more months, but no later than end of the third quarter, early fourth quarter, these shareholders will be transitioned to the long-term shareholders.

And I believe that totally will change the market's perception of this company. So patience is a virtue for us. We're going to keep our head down and focus on our strategy, execute what we have been doing, and once again, I love this company, and I am proud of this team.

Brandon Elliott -- Chief Executive Officer

Neal, it's Brandon, I'll tag onto what Bahram said. As you know, I mean, I think we've laid a strategy that we think fits this business model. It's the right path. I think we are absolutely on the right course.

I think we're allocating capital as well as we've ever done. So I think we're going to -- as Bahram said, we're going to stay the course. We don't appreciate the market valuation. But as you know, Neal, you've been doing this a while, you know that companies and management teams got to put their head down and keep delivering what they say they're going to deliver and keep pushing forward.

And I think that's what we're going to do.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Great response, guys. Thanks so much.

Operator

Our next question is from the line of Lenny Raymond with Johnson Rice. Please proceed with your question.

Lenny Raymond -- Johnson Rice -- Analyst

Hey, guys. How are you doing today? So in the release and -- probably in March, you all talked about increased cost in the first part of the year appearing to be transitory, and then also that you don't see the curtailments coming off into normal levels until the third quarter. From a modeling perspective, like should we be modeling to LOE come in line with what we saw in the first quarter? Or there will be some reduction in that in the second quarter and trend slight down as the year progresses all the way?

Nick O'Grady -- Chief Financial Officer

I think, yes. Lenny, it's Nick. I think you'll see it start to come down some throughout the quarter -- throughout the second quarter and into the third quarter and then eventually will reach its baseline within our guidance. So if you think about the socialization of those costs, obviously, we bore the brunt of that in the first quarter.

We expected it, again delay is probably a little bit higher than we might have hoped for. But at the same time, nothing there. That's why we guide the way we do. But overall, we know where the sort of terminal value of that is, which is well within that range.

And so you should see it get to that within the next few quarters. And maybe just in terms of capital, I want to address this because I am as a former institutional investor, typically I would seize out a company report and the first two things I look at are EBITDA and their capex and just decide what that means. But it's the fallacy of quarterly reporting, which is that we are -- we accrue for our capex. And so if you -- a farmer plants the seeds in his fields and then they grow later, right? And so it's no different for us, which is that we accrue for the wells and processes, and they don't necessarily sync with the completions from a quarter-to-quarter basis.

And I think that's something just to keep in mind as you model that out, which is that on our annual numbers, they will stay quite consistent. But in terms of the timing of how those accruals work, it's not necessarily timed up with the number of net wells that come on in any particular quarter.

Lenny Raymond -- Johnson Rice -- Analyst

That's very good color.

Brandon Elliott -- Chief Executive Officer

Lenny, it's Brandon. I'll put a little on that too, which is, again, if you look back at our results over the years, it's not uncommon to have our 1Q first-quarter LOE be the highest quarter for the year, even in a normal year. And I think you'd -- you know from all the operators that have reported, I would say 1Q was a little bit tougher than normal. So again, not uncommon.

Yes, we probably should have done a better job coming out of 4Q to get that number a little bit higher in our guidance. But again, to Nick's point, we feel really comfortable that it's not that much out of normal, but it's not going to get us back into our guidance and trend for the year.

Lenny Raymond -- Johnson Rice -- Analyst

That was great. And one more for you all. You have kind of talked about -- with Neal a second ago, but with the working interest that you are picking up from -- as operator shedding theirs to come within capital budget. Is this something that we'll be seeing throughout the entire year that you think you'll have the opportunity? Or this is more of a first-quarter phenomenon? Or has it slowed down since early in beginning?

Adam Dirlam -- Executive Vice President, Land

Lenny, this is Adam. I mean Q1 picked where Q4 left off. And we're still seeing the opportunities. So obviously, that could change.

But as far as what we see right now, there is -- we're as busy looking at the deals as we ever have been on a ground game basis. And that gives us availability to be picky too, right? So we're going to take look at the best opportunities and deploy capital that way. So to get back to your question, I don't see the opportunities necessarily slowing down at least in the short term.

Brandon Elliott -- Chief Executive Officer

And let me hit it one more time. I mean these are clearly some outstanding investment opportunities. We're talking about 40-plus percent IRR type prospects with obviously wells that are coming on sooner. It's not acreage that we're buying that could be developed in a couple of years.

These are near-term drilling opportunities with very, very high IRRs. And again, to all of our points, we've made it over and over, we are -- we know there's a sensitivity around capex. But if you and I were sitting in a room together running a private company, these are -- this is the kind of capital you would obviously want to have an opportunity to invest.

Adam Dirlam -- Executive Vice President, Land

And maybe just to add one more thing. The interest that we picked up from the operator represented a third of the transactions that we did, right? So we're getting insourcing opportunities from a myriad of different entities and individuals. They could be the mineral owner who can't necessarily handle the cash call of pad drilling. It could be private entities that's more focused in another basin.

So there is handful of different opportunities and sellers out there than necessarily just the operators cutting these kind of capex opportunities.

Lenny Raymond -- Johnson Rice -- Analyst

All right, guys. Well, that's all I have today. Thank you. 

Operator

Our next question comes from the line of Jeff Grampp with Northland Capital Markets. Please proceed with your question.

Jeff Grampp -- Northland Capital Markets -- Analyst

I'm curious, sticking on the ground game conversation, can you guys touch at all on the valuation side of things? Has that market changed at all drastically either way? And I guess, I'm kind of thinking about if operators were kind of changing their strategies on a non-op side. Is that -- does them coming into the market change the valuations that you guys have been seeing at all?

Nick O'Grady -- Chief Financial Officer

What I'd tell you is that our methodology is completely unchanged. So we analyzed these the same way with our same hurdle rates. What I would say is that -- I don't want to mince words here, but I would say that, look, the gauntlet -- everyone on the phone here is keenly aware, the gauntlet of capital discipline is upon the oil and gas. It's has been a decade of underperformance.

People are furious with oil companies pouring money into the ground and returns on capital are very low. And we have very candid conversations to the operators, which they say it's quite painful for their non-op because they might believe that their internal well 60% rate of return, and the non-op well that they're getting validated is also 60% rate of return, but they have to choose because they're afraid of missing their capex forecast from the street. And so therefore, those wells get parsed out. And -- so ultimately, for our methodology, I would say that it's exactly the same it's always been.

I would say, from a competitive landscape, the main differences in -- is that there's been a game of whack a mole where there is less and less capital available and it has made us more of a clearinghouse and more competitive over time.

Adam Dirlam -- Executive Vice President, Land

One other thing I'd add too is the opportunities that we're seeing are well proposals, right? And so you have a limited number of days in order to evaluate that and that's something where Jim's team comes into play with the 300-plus type curves. We might already be evaluating these wells with the interest that we have in it. And so it gives us the ability to move quickly. And a lot of times the purchase price is important but certainty to close is even more important when these parties are trying to get out of that capital call.

And so you've got a finite number of days to kind of make this happen and that's where Northern's competitive advantage comes into play.

Jeff Grampp -- Northland Capital Markets -- Analyst

Yes. That's definitely a great point on that. And for my follow-up. I was curious on the completion front.

It looks like you guys are roughly guiding to, call it, flat number of wells on a year-over-year basis. But 1Q looks to be up a little bit, ground game sounds great, wells in process, Brandon you said, highest ever. So how do you guys kind of think about the potential of putting more wells online than what you've got it right now and obviously, ramping up capex? But returns are good. So I guess, just kind of wondering how you guys are evaluating that potential trade-off as the year progresses.

Brandon Elliott -- Chief Executive Officer

Yes. This is Brandon. I think as Adam and those guys are looking at these additional opportunities and the ground game stuff. Some of that stuff at this point in the year, if we're just getting started on it is really going to be stuff that gets added probably early next year or at the very soonest, very late this year.

So I think that's why we feel comfortable with our capex guidance where it is because the ground game stuff that we're seeing now is much more of a 2020 activity baseload as it is a 2019 addition at this point.

Jeff Grampp -- Northland Capital Markets -- Analyst

All right. Understood. Appreciate those details.

Operator

Thank you. Our next question comes from the line of Derrick Whitfield with Stifel. [Operator instructions] Again, our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Thanks. Good morning all there. Perhaps for Brandon, Mike or Adam on this one. Building on the question, the setup that you guys have outlined in your ground game opportunities certainly make sense from an investment perspective.

Just for the benefit of those listening, could you comment on the magnitude of inflation you're seeing relative to past years?

Brandon Elliott -- Chief Executive Officer

Yes. I mean obviously, Adam mentioned, busiest ever. And I think as Nick mentioned the fact that operators are shedding some of that -- wanting to shed some of that non-op capital. I think it's a -- it continues to be robust.

Quantifying it as far as pickup over year over year on a net well basis, I'm looking at Adam to see if he's got maybe data in front of him, just quantifying it.

Nick O'Grady -- Chief Financial Officer

I mean -- Derrick, it's Nick. I'll just give you a comment. I'd seen three material ground game deal as shock to me that in aggregate would represent over $150 million of capital. And I'm not -- now I don't want to -- make it clear that, that's not $150 million capital we're going to spend, but it's just the magnitude of the number of transactions that are out there and the scale and size of some of them.

Adam Dirlam -- Executive Vice President, Land

I guess we keep going back to rate of return. That's what we're focused. And so that rate of return might be smaller working interest, it might be on larger ones. Kind of the overall landscape we're seeing is, with the operators shedding that, it's definitely larger than it has been maybe in the first half of 2018, we saw that start to pick up in Q3, Q4 of 2018 it's kind of stayed consistent with that opportunity set through today.

Brandon Elliott -- Chief Executive Officer

And Derrick, obviously, as you know with all this pad drilling and the big capex call, it can come down, that shakes loose some -- even more of that interest. And again, with this much opportunity coming at us, we're obviously being pretty damn selective on what we're willing to bid at and look at.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

That's very helpful. And as my follow-up perhaps for Nick. In your prepared comments, you noted higher intensity completions and longer laterals. Are you guys seeing completions with proppant intensity in excess of 1,000 pounds per foot and lateral links in excess of two miles?

Nick O'Grady -- Chief Financial Officer

I'll let our illustrious engineer answer that question.

Jim Evans -- Vice President, Engineering

This is Jim. We're seeing some operators do some tests where they're going all the way up to 2,000 pounds per foot. We're still waiting on the results on that kind of stuff, but we're getting proposals for that already. We've got some of our operators that -- along the lake, they're trying to drill a little bit longer laterals.

So they're drilling 3-mile laterals, and then we're also seeing some tests of dual laterals. So they'll drill one in the Bakken and one in the Three Forks from the same vertical location. So that's what's driving some of those higher costs.

Brandon Elliott -- Chief Executive Officer

Higher returns, but also higher costs.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

And then if I could sneak one more in for you guys, and this is really a relatively open question. But in recent months, we've noticed you've linked in your message on the merits on the non-op model in your PowerPoint. Are there specific elements that you guys believe are misunderstood by the street?

Brandon Elliott -- Chief Executive Officer

Yes. I think the guys that have followed us for a while understand the non-op and the benefits and risks associated with it. I think most importantly as we're -- as Bahram mentioned earlier, we're trying to expand the shareholder base and reach farther as this industry is going to have to do to gain back some generalist and gain back some energy investors. So we just want to make sure that we take the time to really clarify what all this non-op means to those that aren't familiar with us and help them understand the benefit.

Bahram Akradi -- Chairman

And I like to add the emphasis -- this is Bahram again. The emphasis that I want to make is, it is just that when I talked to investors, there is this sort of a notion, they've heard from somewhere non-op is good and everybody's jumped on the bandwagon. And frankly, I think there is a vast difference between a non-op that has 2,000 acres and works with the couple of operators versus a non-op the size and magnitude of Northern Oil and Gas. Our ability to flex, make decisions, participate, not participate, yet maintain our growth, yet to allocate capital correctly, it's unmatched to any other non-op in Bakken for certain.

So that is what's misunderstood. And I keep thinking that maybe just time and the fact that we will continue to deliver what we promised will correct that itself with the investors. We just need to be there, we need to be present, we need to be consistent, and we need to have enough scale that the shareholders, investors, will focus, they'll watch maybe another quarter or a second -- two more quarters and eventually, they realize that the performance is one they can count on, and that's really what we need to continue to do.

Nick O'Grady -- Chief Financial Officer

And Eric, it's Nick. I just want to put a pin in that and just say, investors seem to be fixated in the public markets with royalty businesses. Well, what do royalty businesses do? They pay a large amount of money for a royalty stream upfront and then eventually, that acreage gets developed without their control and they earn a cash return on net, and it's basically a PV function of whatever they pay for it and when it gets developed. We pay a small portion for the leases in the acres we buy and a small portion when the well is developed, and then we get a PV of cash flows from that stream.

They're the same business and yet I get asked constantly by the market, well, what should be the non-op discount relative to an operator, yet the market has no problem paying huge premiums for the royalty businessman, when in the end, they're really the same business. At the end of the day, it's money in and money out, and we have no more or no less control than the royalty company does. In many cases we have better because again, we're talking to you about the ground game, about what we do. And the scalability of our business is just as significant as that one.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Very helpful, guys. It's a very interesting point too as well.

Operator

Thank you. Our next question comes from the line of Jason Wangler with Imperial Capital. Please proceed with your question 

Jason Wangler -- Imperial Capital -- Analyst

Obviously, with the NGL, the natural gas issues up there, and you guys being -- with your [Inaudible]. Are you seeing any of the operators kind of shift to certain areas? Or is it just more basinwide and it's kind of -- everybody just acknowledges it and just kind of moves on knowing that it should be kind of [Inaudible].

Brandon Elliott -- Chief Executive Officer

I think it's -- there are certainly operators that are maybe better positioned than others, and so you do have operators that are moving timings of completions and timing of curtailments in conjunction of build-out of additional takeaway. So you are seeing -- I mean it's when the operators are good, right, the logistic side there, they are keeping a keen eye on the gas side of it, but it does present a little bit of lumpiness operator to operator. And then obviously, propane pricing during the quarter wasn't great. We do think it's transitory, Jason, I think as we move through the second quarter into the third quarter, I think we've got some additional takeaway capacity and processing on the gas side that should help us in the back half.

Jason Wangler -- Imperial Capital -- Analyst

Nick, maybe for you. You guys talk about the remainder of the year, the next couple of quarters kind of focusing on debt reduction. Obviously, there is something outstanding on the credit facility, but also I believe you have a $50 million authorization to buyback on the second lien. Just curious how you think about weighing those two options as you move forward with the cash flow?

Nick O'Grady -- Chief Financial Officer

I think we'll be opportunistic. I think that if the bonds present us an opportunity, we'll consider prosecuting on it, and we'll also -- but at the same time, obviously the default is just to pay down the revolver. Obviously, we'll a draw on the revolver when we purchase Flywheel, so that comes front and center to make sure we have adequate liquidity at all times. But that authorization is there and real and present, and if the bonds trade -- we missed a window in -- at the end of the year where the bonds traded below par and wish we had been there for that but the amendment wasn't done yet.

So we'll keep in mind.

Jason Wangler -- Imperial Capital -- Analyst

Thank you.

Operator

It appears we have no further questions at this time. So I'd like to pass the floor back over to Mr. Elliott for any additional concluding comments.

Brandon Elliott -- Chief Executive Officer

Thanks, Jessie. We obviously appreciate everyone's participation in the call and your interest in Northern Oil and Gas. Do please take note that we have a busy schedule for the next several months at conferences around the country. Some of those details are included in our press release.

So we look forward to seeing some of you on our travels, and we plan on talking with you all again next quarter. Jessie, you can give the replay information, and we appreciate everyone's time. Everyone, have a good weekend.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Brandon Elliott -- Chief Executive Officer

Bahram Akradi -- Chairman

Nick O'Grady -- Chief Financial Officer

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Nick OGrady -- Chief Financial Officer

Adam Dirlam -- Executive Vice President, Land

Lenny Raymond -- Johnson Rice -- Analyst

Jeff Grampp -- Northland Capital Markets -- Analyst

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Jim Evans -- Vice President, Engineering

Jason Wangler -- Imperial Capital -- Analyst

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